Monday, May 22, 2006

The cost of the Iraq war, in context

By Martin Wolf of the Financial Times.
Definitely worth a read, but if you haven't got a subscription, listen to his free podcast here instead.
"Before the Iraq war began, Lawrence Lindsey, then president George W. Bush’s economic adviser, suggested that the costs might reach $200bn. The White House promptly fired him. Mr Lindsey was indeed wrong. But his error lay in grossly underestimating the costs. The administration’s estimates of a cost of some $50-$60bn were a fantasy, as were Saddam Hussein’s weapons of mass destruction, and much else."
Listen here

Hands off the internet

Click here to watch a very short flash presentation about how regulation is attempting to change the internet. If you blog, etc, it affects you because it may eventually affect your [civil] rights (and in some cases - where required for persecution reasons - anonymity).
Have a look: Hands of the internet.

Teleshopping - guns for sale !!

This is a poignant illustration by Oxfam. If it comes across as ridiculous (the concept of it), then the sad truth is that for those that deal in arms trade, it is as simple/ridiculous as what you see in the Oxfam video.
Watch it here: Guns for sale
See the following link as well: The problem with arms is...

Answer to Asia’s rise is not to retreat

Martin Wolf of the Financial Times presents (in a podcast) the facts about how developed economies should respond to up and coming Asian economies. It is refreshing, and he utilises basic pure economic argument that is literally common sense, to explain the pros and cons.
To quote him on another of his podcasts (Tyranny of vested interests), the [simple] solutions to the challenges posed are deemed easy to achieve, which couldn't be farther from the truth. The tyranny of vested interests is a heading that fits perfectly over the current developed world stance, vis-à-vis emerging and poor countries.
Listen to his other podcasts here
One theme that keeps precipitating in my research is that we [in the world] are now well knowledgeable about what holds us back, the threats to globalisation, international integration and the lot of it. The forces of vested interests that distort world trade and subsequently incomes, etc, and the vested interests behind corruption within poor countries are behemoths that are difficult to breakdown and eliminate. This has been explained ad nauseum.
It appears that the modus operandi is for a politician or celebrity to come along, every now and again, to remind us of the consequences of our inward vision and inaction, often with an agenda of their own. It is refreshing when an economic heavyweight such as Mr Wolf reminds everybody that the solutions are not rocket science, they just lack support. As simple as that, but how do you effectively generate consistent support?

Friday, May 19, 2006

Dollar - appreciating or depreciating?

The markets are confusing many, myself included. This is a time when even seemingly positive information is working against the respective home currency for "other" reasons. Let me explain.

When the Fed signalled that its monetary tightening might have come to an end at 5%, the expectation was that, say, sterling would appreciate against the dollar, as attention - finally - turned to fundamentals like the current account deficit and the inflationary impact of the insatiable appetite of the US consumer. But, even though sterling has appreciated against dollar, the impact of cheap imports has been disinflationary in the US, which has allowed investors to still see the dollar as a worthwhile vehicle for carry trades, creating some dollar support.

There was a recent upside surprise in US inflation data, which now has markets speculating that the FOMC may raise interest rates to keep in inflation under control. This has generated two opposite views:
1. Some will now go long on the dollar, expecting the inflation-controlling moves to be supportive from a currency perspective.
2. Others are selling dollar because they are concerned that the US may be close to the tightening tipping point, from which further interest rate rises will cause a retrenchment in consumer spending and a slowdown in the rate of economic growth.

So, the question is do you buy dollar or sell dollar? Apparently dollar traders have been selling Euro and buying dollar (which supports a dollar appreciation), and Euro traders have been doing the opposite, selling dollars and buying Euros (resulting in Euro stability).

The consensus seems to be that the dollar should depreciate but nobody wants it to do so relative to their currency, and especially not the Asian economies. Therefore, there may be some intervention that is preventing the dollar from breaching the $2/£ mark.
In the UK, the housing market seems to be continually improving, retail sales volumes have also been improving (year-on-year); explained by short-term household liquidity (with price discounting in consideration), and surveys suggest a positive picture for the economy, which, in totality, makes a neutral-hawkish MPC look likely to turn more hawkish than neutral, a scenario that would favour sterling.

Which way are we going?
Even with a more hawkish than neutral MPC, raising UK interest rates may not happen for the near-term. Why? Because, the sterling exchange rate index (ERI) has risen quite a bit, helping to keep the rate of UK inflation lower than it could be (because of cheap goods for UK consumers, relative to our exports), which is comparable to raising interest rates. So the ERI has done/is doing the job for the MPC, creating a disinflationary environment.
I don't know how anyone can make a decisive strategic decision regarding dollar-sterling at the moment. Does anyone hold a different view?